The Wall Street Journal
Handout 1
Globalization’s Gains Come With a Price
By Bob Davis, John Lyons and Andrew Batson
Puebla, Mexico  Like millions of other low-wage workers here, Hermenegildo Flores was supposed to
benefit from Mexico’s decision to open its economy to foreign trade and investment in the 1990s. For a
time, he did. As U.S. companies boosted purchases from Mexican factories, Mr. Flores’s salary nearly
doubled to $68 a week in 2001.
(2)
Then foreign competition from places like Pakistan, India, and El Salvador intensified: Mr.
Flores, who sewed pockets onto blue jeans, says his foreman “would go around shouting, ‘If you don’t
work harder, we are going to shut this plant down and move it to Central America.’ ” Today, Mr. Flores
is unemployed, having accepted a $900 buyout in April after the company switched to new machines.
(3)
A decade ago the globalization of commerce promised to be a boon to low-wage workers in
developing nations. As wealthy nations shed millions of jobs making apparel, electronics and other
goods, economists predicted that low-skilled workers in Latin America and Asia would benefit because
there would be greater demand for their laborand better wages.
(4)
In some ways, globalization delivered as promised. But there was an unexpected consequence. As
trade, foreign investment and technology spread, the gap between economic haves and have-nots has
frequently widened, not only in wealthy countries like the U.S. but in poorer ones like Mexico,
Argentina, India and China as well. Many economists now say that the biggest winners by far are those
with the education and skills to take advantage of new opportunities, leaving many lagging far behind.
Incomes of low-skilled workers may rise, but incomes of skilled workers rise a lot faster.
(5)
“While globalization was expected to help the less skilled . . . in developing countries, there is
overwhelming evidence that these are generally not better off, at least not relative to workers with higher
skill or education levels,” write economists Pinelopi K. Goldberg of Yale University and Nina Pavcnick
of Dartmouth in the spring issue of Journal of Economic Literature.
(6)
Globalization deserves credit for helping lift many millions out of poverty and for improving
standards of living of low-wage families. In developing countries around the world,
globalizationdefined as trading and participating in the global economyhas created a vibrant middle
class that has elevated the standards of living of hundreds of millions of people. That’s particularly true in
China, where the incomes of low-skilled workers have consistently risen. The poor in countries like
Vietnam and elsewhere in Southeast Asia have also benefited greatly since those countries have opened
their economies. In many developing countries around the world, life expectancies and health care have
improved, as have educational opportunities.
(7)
But because globalization is also creating more inequality, it is raising questions about how much
inequality countries can bear and whether these gaps could ultimately produce a backlash that will
undermine trade and investment liberalization around the world.
Following the U.S.
(8)
Many developing nations seem to be following in the footsteps of the U.S., where the income gap
has grown sharply since the early 1970s. A 2006 study of Latin America, a region long marked by
profound gaps between rich and poor, by World Bank economists Guillermo Perry and Marcelo
Olarreaga found that the income divide deepened after economic liberalization in 9 of the 12 countries
examined.
(9)
While that could partly be explained by Latin America’s slow rate of economic growth, income
gaps are widening in fast-growing Asian nations as well, including Thailand and India. It’s even grown in
the past decade in South Korea, a country long known for an egalitarian commitment to education.
(10) Then there’s China. One of the fastest-growing economies in the world has generated significant
wage gains for its rank and file. Yet income inequality is also growing because of the huge gains being
posted by the upper crust. Between 1984 and 2004, China’s income inequality as measured by the Gini
indexzero is perfect equality and 100 is perfect inequalityincreased to 47 from 29, according to
World Bank researchers Martin Ravallion and Shaohua Chen. From 2000 to 2005, per-capita income of
the bottom 10 % of urban households in China rose 26 % while those at the top saw gains of 133 %.
(11) While Mexico hasn’t experienced the spectacular growth of China, wages of those at the bottom
10th percentile of urban full-time workers increased 12 % between 1987, when the country first took steps
toward opening its economy, and 2004. Since 2000, the percentage of Mexicans living in extreme
proverty also has fallen below 20 % for the first time ever in the nation’s history.
(12) Even so, skilled workers in Mexico still earn far more relative to unskilled workers than they did
before liberalization. In 2004, full-time urban workers at the top 10th percentile earned 4.7 times more
than those at the bottom 10th, compared with 4 times a much in 1987, according to Columbia economists
Eric Verhoogen and Kensuke Teshima.
(13) By other measures, income inequality is far greater. The World Bank, for instance, estimates that
the top 10 % of Mexicans accounted for the 39 % of the country’s total spending in 2004, while the
bottom 10 % accounted for less than 2 %.
(14) The consequences of widening income inequality are profound. Those without much education or
skills often find themselves stuck in jobs in the underground economy that don’t pay health-care or
pension benefits. That’s boosted immigration to better-off regions domestically or to the U.S. and
Europe, where anti-immigrant sentiment is surging.
(15) Growing inequality also feeds the populist argument that globalization is a sucker’s game that
benefits only the elites.
(16) In Latin America, that sense of alienation has powered populist presidential candidates who won
in Ecuador, Bolivia, Nicaragua and Venezuela and came close to carrying Mexico last year. In China, the
ruling Communist Party worries that support for liberalization could crumble. The government needs to
“safeguard social fairness and justice and ensure that all of the people share in the fruits of reform and
development,” said Chine premier Wen Jiabao in March.
(17) How does globalization boost inequality? The question is too fresh to have definitive answers, but
it’s clear that international competition forces local firms to add skilled workers who can handle newer
technology and shed workers who can’t. Foreign firms bring new technology to developing nations and
boost demand there for skilled workers by paying 10 % to 20 % more than domestic firms, says Dirk
Willem te Velde, a research fellow at the Overseas Development Institute, a United Kingdom think tank.
(18) Access to education also plays an important role. Developing nations rarely crank out enough
college- trained workers to match growing demand, boosting the wages of fresh graduates. Unskilled
workers who get laid off can’t find retraining and add to the pool of workers looking for low-wage work.
(19) The effects of globalization are vividly on display in Puebla, a city of 1.5 million known for its
baroque churches and colonial architecture. Located between the port of Veracruz and Mexico City, 70
miles to the northwest, Puebla has long been a center of trade and textile. As with the rest of Mexico, its
industries were protected after World War II by high walls of tariff and quotas, and by restrictions on
foreign investment.
(20) During the 1970s, those barriers helped produce rapid economic growth, but the system collapsed
in a debt crisis and deep recession that swept through Latin America in the 1980s. To restart the
economy, Mexico began dismantling its import barriers in the mid-1980s and tied itself tightly to the
world economy through the North American Free Trade Agreement, or NAFTA, with the U.S. in 1994,
and a passel of other trade accords since then. At the time Mexico’s politicians and economists predicted
that globalization would produce many new jobs in Mexico, especially for those at the bottom, as
companies that produce low-skilled goods set up shop south of the border.
(21) “Mexican wages will not remain low if we are capable of growing,” said Mexican then-President,
Carlos Salinas, in 1991 when he was promoting Nafta.
(22) For a time, that turned out to be right. Towel-maker Industrias Cobitel SA picked up two big new
U.S. customers after Nafta and doubled the number of production workers to 250 by 2000. Exports
accounted for 40 % of the company’s sales in 2000, about triple the percentage before Nafta. Business
was so brisk that many employers didn’t care whether new hires had much schooling.
(23) But foreign investment and competition also prompted a big demand for skilled labor. Local
companies that had gotten by with outmoded machinery either upgraded or closed.
Volkswagen’s Impact
(24) Volkswagen AG, the city’s largest employer, has had an especially large impact on the local
economy. The company for years produced “Vochos,” as VW Beetles are called in Mexico, on an oldfashioned production line where dents were banged out with mallets. But as Mexico opened its economy,
VW ratcheted up the demands on its work force.
(25) The company started building the new Beetle in Puebla in 1998 and followed with other models
aimed at hard-to-please U.S. buyers. New machinery was imported. Now welds are done by laser. Robots
paint the exteriors of cars for an even finish. In the past decade, the company has doubled the number of
engineers to 700 and is planning to add 100 more this year. They make between $400 and $600 a week
and are college graduates.
(26) At the same time, VW slashed its Puebla work force by about 25 % since 2000 to 14,000, mostly
eliminating assembly jobs, and outsourced production of seats, steering wheels and wire harnesses to
factories in a sprawling industrial park outside the gates of the manicured VW campus. Assembly
workers at those factories are paid about one-third the $225 a week VW line workers make. Many autoparts companies won’t hire laid-off VW workers, figuring they can’t make the financial adjustment.
(27) Ricardo Mosqueda Martinez lost his job at VW and worked for a time a parts supplier. “When I
first saw the paycheck, I thought to myself, is this a joke?” he says. He didn’t last long there. Like many
other VW employees, Mr. Martinez ended up in Puebla’s informal economy, working as a gypsy taxi
driver and doing other jobs.
Opening Opportunities
(28) For Poblanos, as Puebla natives are called, with the right education, globalization has also opened
opportunities that were absent in Mexico just a decade ago. Victor Pasilla, the 30-year-old son of a
hospital security guard, makes $600 a week designing oxygen sensors for a Puebla start-up Biomedica
Integral SA, which hopes to build neonatal surgical beds for export. “It’s been a big leap,” says Mr.
Pasilla, who has outfitted his parents’ home, where he still lives, with its first telephone and computer.
“My parents are quite proud that their children are moving upwards.”
(29) The surge of well-to-do residents has changed Puebla’s look. In the once-poor south of the city,
housing developments of small, brightly colored homes, each topped with water tanks, have opened for
families who have become eligible for mortgage financing. There are also two new shopping malls with
international clothing stores, including Zara and Massimo Dutti.
(30) Low-paid textiles or auto-parts workers don’t shop at Zara, although many now frequent the local
Wal-Mart, which offers food, clothing, and appliances at good prices. Low-wage workers live as they
have for many years, in cramped urban tenements ringed with razor wire to keep out thieves.
(31) Part of Mexico’s problem is that U.S. manufacturers looking for bargain prices have rerouted
orders to China, where wages are even lower. Cobitel, Puebla’s towel maker had to cut payroll after a big
South Carolina textile customer shifted orders to China in 2004. Overall, Mexican textile jobs that pay
health benefits, which peaked at 195,000 in 2000, fell by one-third to 127,000 this year, according to
Labor Ministry statistics.
(32) But China’s success doesn’t fully explain the puzzle of growing global income inequality. If it
did, China’s low-wage workers would have seen especially fast growth in income, reducing income
inequality. While low-wage workers have benefited, it’s elite workers have benefited most. In part, that’s
because the companies in China doing work for overseas markets usually look for a set of skills few
Chinese have, such as foreign language fluency and technical knowledge.
Social Tensions
(33) A flood of such well-paid workers has transformed the coastal city of Dalian, a magnet for
investment from neighboring South Korea and Japan. The city’s crumbling slums and boarded-up
factories have given way to new shopping malls and fancy apartment complexes, reflecting how millions
of Chinese can now own their own homes, buy Western consumer goods and even travel abroad. Bu the
accompanying surge in real-estate prices has made Dalian nearly unaffordable for lower-paid locals, who
often complain they are being literally pushed out of the city.
(34) “The fact that ordinary people at Dalian can’t afford to buy a house in the city center is
indisputable. “The city government should reflect on this, one Dalian resident using the name Mu Fan
wrote in a comment on a government-sponsored Web site.
(33) Such social tensions have become an increasing political problem for the Communist Party,
whose legitimacy rested on its ability to deliver a broad improvement in the populace’s standard of living.
Wary of being identified as favoring an urban elite, leaders have this year expanded social programs for
the poorest and campaigned against wealthy people who flout tax and family-planning laws.
(36) Expanded education can ease inequality, as more workers qualify for skilled jobs. In Mexico, the
income gap has diminished somewhat since 2000, partly reflecting improved education levels. Since
2000, for instance Puebla State Popular Autonomous University, a large private university, has added
undergraduate degrees in such specialties as bionics, electronics and software and is planning to add
degrees in biotechnology, power-grid administration and plastics.
(37) Another major factor: So many Poblanos have given up on their home turf and migrated to the
U.S. that competition has eased somewhat for lower-skilled jobs. The greater number of Poblanos
working abroad has also increased the amount of cash being sent back home, boosting the incomes of
many residents. In the past decade, New York has become a magnet for many Poblanos, so much so that
mole poblano, a Puebla specialty, is now widely available for sale in the borough of Queens.
(38)
Mr. Flores, the unemployed tailor, has two brothers who have decamped to the U.S. but says he
doesn’t want to follow suit because he doesn’t want to leave his wife and daughter. Instead, Mr. Flores is
looking for work as a day laborer, building homes for Puebla’s middle class. I have a fight in front of me
trying to find the work,” he says.